Textron Inc. Q1 2007 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the fiscal quarter ended March 31, 2007. Textron Inc. operates through four reportable segments: Bell (helicopters and defense systems), Cessna (business and general aviation aircraft), Industrial (diverse industrial products), and Finance (commercial and captive financing). The company utilizes a dual borrowing group structure, separating Manufacturing and Finance operations to optimize capital structure and borrowing power.
Key Financial Metrics
| Metric | Q1 2007 | Q1 2006 |
|---|---|---|
| Total Revenues | $2,964 million | $2,632 million |
| Net Income | $196 million | $168 million |
| Diluted EPS (Continuing Ops) | $1.55 | $1.19 |
| Operating Cash Flow (Consolidated) | ($65) million | $77 million |
| Total Assets | $17,702 million | $17,550 million (Dec 2006) |
| Total Debt (Manufacturing + Finance) | $8,760 million | $8,662 million (Dec 2006) |
| Cash and Equivalents | $585 million | $780 million (Dec 2006) |
Note: Manufacturing group gross debt-to-capital ratio was 40% as of March 31, 2007.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 13% ($332 million) year-over-year, driven by a favorable mix of Citation business jets at Cessna, higher armored security vehicle (ASV) deliveries at Bell, and increased volume in the Industrial segment.
- Profitability: Segment profit increased $74 million to $358 million. Earnings per share from continuing operations rose 30% to $1.55, aided by higher revenues, improved operating performance, and a reduced share count due to buybacks.
- Cash Flow: Consolidated operating cash flow turned negative ($65 million outflow) compared to a $77 million inflow in Q1 2006. This was primarily due to increased inventory levels to support growth, timing of accounts payable, and accrued interest payments.
- Share Repurchases: The company repurchased 1.76 million shares for $164 million, reducing the diluted weighted-average shares outstanding by 5.4 million compared to the prior year.
Outlook, Risks, and Unusual Items
- ARH Program Risk: Bell Helicopter is performing under a U.S. Government contract for the Armed Reconnaissance Helicopter (ARH). The first production lot option expired in Q1 2007. The company incurred a $25 million charge in Q1 2007 for costs exceeding contract funding, as recovery is not assured. Management believes the second production lot option is unlikely to be exercised under current configurations.
- Legal Contingency: A jury verdict from 2005 awarded a former supplier $95.7 million (including punitive damages) related to Lycoming engine failures. Management intends to appeal and believes the verdict will be reversed.
- Accounting Changes: Adoption of FSP 13-2 regarding leveraged leases resulted in a $33 million reduction to retained earnings and a $50 million reduction in leveraged lease investments. Adoption of FIN 48 increased retained earnings by $22 million.
- Finance Segment: Portfolio quality remains strong with nonperforming assets at 1.32% of total finance assets. Net charge-offs were $4 million.
Investor Verification Checklist
- ARH Contract Status: Verify the outcome of discussions with the U.S. Government regarding the ARH program and the potential for additional charges or contract termination.
- Inventory Levels: Monitor the $276 million increase in inventory (Manufacturing group) to ensure it aligns with future delivery schedules and does not lead to future write-downs.
- Operating Cash Flow: Assess the sustainability of negative consolidated operating cash flow and the company's reliance on financing activities to fund operations and dividends.
- Legal Appeals: Track the appellate process for the Lycoming engine lawsuit to determine if the $95.7 million liability will be resolved or reversed.
- Debt Maturities: Review the Finance group's $2.6 billion in debt and other liabilities payable within 12 months against available liquidity and credit facilities.